Fragility of reputation

A few years ago, I was at a conference on intangibles in London listening to an executive from BP (the UK energy company). He was explaining how the recent deal to invest in Russia was based on an intangible asset. Russia was seen then as a very risky place to invest. This investment would work because of BP's reputation -- that reputation alone increased the value of the joint venture.

In the short term, that seems to have been true. However, in the long term this case illustrates the fragility of reputation as an intangible asset. Yesterday, the head of the joint venture TNK-BP, Robert Dudley, was forced to leave Russia because he was denied a work visa. (For details, see stories in New York Times, Wall Street Journal, Financial Times and Washinton Post.)

The deal may have been doomed from the beginning. As the Post story explains:

The marriage of British oil giant BP and a group of Russian-bred tycoons in a joint venture in 2003 was strained from the start.

"The first risk . . . is mutual distrust," the joint venture's executive director German Khan warned his colleagues in the company newsletter when the deal was signed.

Mistrust has curdled into open hostility, despite the fact that the 50-50 joint venture, called TNK-BP, has doubled or tripled in value -- and paid out a staggering $18 billion in dividends to its shareholders in just five years.

Even with that success, it appears that the partners are fighting over control of the goose, not content with having a share of the golden egg. As the Journal article points out, the Russian's don't necessarily want BP's reputation anymore. In fact, they bridle at what they see as the treatment of the joint venture as a subsidiary of BP:

"TNK-BP is an independent oil company in which BP is not a controlling shareholder," Mikhail Fridman, chairman of the TNK-BP board, said in a statement. He insisted that BP nominate a "new independent CEO who would be based in Moscow and manage TNK-BP in the interest of all shareholders."

Reputation is only as good as the actions that back it up. And protecting reputation is often a difficult task, even when you are in the position to act. BP is in an awkward position of having their name on the line without necessarily having the power to control events. Such is the case that others can also find themselves in. This is why reputation is one of the most powerful yet precarious of intangible assets – and one that needs to often be given special attention.